Apple Pay may become more personal

Friday 13 November 2015 | 16:45 CET | Background

Apple is working on a person-to-person payment scheme, the Wall Street Journal reports. The service would enable consumers to transfer money from one person to another, likely under the Apple Pay umbrella. Several payment platforms already offer P2P services, including Stripe and PayPal subsidiary Venmo. Google and Facebook offer P2P as well. All these have in common that they are loss leaders for other services. The supposed Apple P2P would work in the same way.

While the Apple plans are not finalized, a service could be launched in 2016. According to people familiar with the matter, the plans are serious enough to advance from a meeting room inside Apple Pay’s sealed-off headquarters to talks with banks and payment service providers. Apple must have support from banks for a clear reason: cost.

P2P Services are free

Electronic P2P payment schemes are free for consumers. In all likelihood this will always be the case, because those services compete with other payment options that carry no visible costs. If you want to split the bill in a restaurant or pay the babysitter, cash or check is still an option, or a direct transfer.

Their key selling point is the lower threshold. It’s no longer necessary to share a banking account number, because the mobile number, email address or social media profile is already stored in the smartphone. Apple may also capitalize on safety and anonimity by using end-to-end encryption for messages. 

That means that a service provider can’t make any money on P2P services to balance the cost of the platform. Even if offering the service is probably not very expensive – if it is built on an existing platform – it’s not free, due to overhead and some regulatory and compliance effort.
In reality this also means that the service can only work if the money is transferred directly between two banking accounts. If a credit card is involved, the transaction fees will kill it. Apple would need banks for this.

In talks with banks

WSJ writes that Apple may opt to not develop the service in-house, but to adapt an existing platform: clearXchange. Five retail banks have together developed their own p2p scheme. It is offered by Bank of America, Capital One, Chase, FirstBank, USBank and Wells Fargo.

Account holders from these banks can send money to an e-mail address or mobile number and collect the payment in their own online banking portal or app. If a recipient is not registered or with a different bank, signing up is necessary to collect the money.

The clearXchange service does not move funds. Instead, it provides the information needed by member banks to transfer the funds and complete the transaction. Those banks clear and settle the payments, which is a cost-effective way, if not very quick. It can take up to three business days before they come through, clearXchange says.

For banks, the overall cost of a payment option is an important consideration. Handling cash and processing checks costs money and credit card payments come with not insignificant fees. Therefore on a system level, peer-to-peer payments may help to reduce cost and increase efficiency. For banks, the P2P payment is also part of a wider set of services for their customers.

Growth for Apple Pay

Expanding the offer would make sense for Apple as well as it could help to drive the adoption of its Apple Pay services. Apple Pay has yet to reach its full potential. While the number of in-store payments keeps growing, it’s still a minority of iPhone users who actively use it, either in shops or online. Apple Pay is Consumer-to-Business (C2B) so adding Consumer-to-Consumer (C2C) would complement it.

P2P services could play a role in the 'app-economy', where online platforms serve to match supply and demand for person-to-person services. The growth of these services  will stimulate informal payments as alternative to cash. However, if reducing the role of cash leads to more card use, the cost to society may shift or even increase. In the US, the Uber app supports multiple payment options including PayPal, Google Wallet, Apple Pay, AmEx Points and Capital One/Quicksilver. 

Even then, an Apple P2P service would face strong competition. From many consumers, any brand is probably a nice-to-have and not a must-have in the way mobile messaging is. Alternatives are available after all, and a limited reach will always count against a particular service. Even if Apple P2P offers a good user experience, that advantage disappears if the recipient is not on iPhone.

Apple is a big player in the smartphone market, but the Android ecosystem is larger. Google is developing Android Pay, with the potential to integrate that with e-commerce and advertising. Google’s addressable market is not confined to Android devices either, because the "Send Money' service is tied to a Gmail address and Google apps work on iOS devices as well. Facebook has a very large user base across all mobile platforms and is adding new services on a regular basis.

Therefore Apple might position a P2P service to compete with those other platforms, while cooperating with the banks that support Apple Pay.

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